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ISSN: 2151-6219
Review Article
I S Monetary Policy Necessary for the Economic Development of Less
Developed Countries with Special Reference to Pakistan
Rabia Najaf*
Riphah International University Islamabad, Islamic Business and Finance, Pakistan
Abstract
In this paper, observed that impact of monetary policy on development of under developing country like Pakistan. For this
purpose, we have utilized the OLS model and taken data from 1982 to 2009. Our results are showing that there is negative
association between monetary policy and inflation and there is positive association with GDP and Bop. The most effected
recommendations are that for better growth there is need of best favorable investment climate for appropriate interest rate,
liquidity management and money market.
Keywords: OLS Model; Interest rate; Exchange rate; BOP; Money
market; Liquidity management
Introduction
Monetary policy is way that tells us that how can be maintained
economic growth. It has influenced on economic growth, price stability
and BOP. According to act 1958, central bank made polices of monetary
policy. In simple words, and monetary policy is such a process, in
which central bank and monetary authority of that country control
supply of money. Since 1970, Fiscal policy has generally been formed
after monetary policy. Most of studies had been proved monetary
policy as contractionary. Expansionary monetary policy diminishes
the worth of currency (Figure 1). Mostly, monetary policy is generally
associated with availability of credit. Monetary policy has main tools
are short term interest rate and another main tool is bank reserves. In
many countries, there are two types of monetary policy 1) decisions
about coinage 2) decisions to print money. Central banking system was
set up in 1890 and after this point central bank is known as last resort.
Every year state bank of Pakistan makes its monetary policy and
rules and makes unchanged policy rate. In August CPI rate was 5.75%.
After deliberations the committee of SBP has maintained its policy rate
at 5.78%. For the proper, decision there held a meeting in Washington
and finance minister Shaq Dar were highlight issues our banking
system now a days and he also address the major issues, which are
facing Pakistani s’ nation now a days.
Monetary policy has main role in the development of economy;
with the help of monetary policy Government can control inflation
Figure 1: Expansionary monetary policy.
Bus Eco J, an open access journal
ISSN: 2151-6219
Najaf, Bus Eco J 2017, 8:1
DOI: 10.4172/2151-6219.1000289
Open Access
and can maintain BOP. The principle objective of monetary policy
is to control money. Monetary policy has role to promote economic
development and stabilize exchange rate. Monetary policy is acting a
main role to control inflationary pressures. Mostly, monetary policy
used quantitative and qualitative methods for measuring inflation
rate. Open markets are small, therefore, monetary policy is not applied
properly.
To Achieve Price Stability
Monetary policy acts as bridge between supplies and demand
therefore; it is seen as the best way to achieve price stability. Monetary
authorities are taking a better decision for further improvement of
poverty of all under developed countries. Monetary policy in the shape
of interest rate and interest rate plays an important role for enhancement
of poverty level. Government can be completed their planning with help
of monetary policy. For instance, they have authority to develop their
country to establish infrastructure, transport, chemicals etc. Monetary
authority is being focused on interest rate policy because interest rate
policy is known as anti-inflationary.
Objective
1. Impact of monetary supply on GDP of Pakistan.
2. Impact of monetary policy on BOP.
3. Impact of monetary policy on inflation.
Problem Statement
Is monetary policy in importance for development of less developed
country?
Literature Review
The following authors found there is positive association between
*Corresponding author: Rabia Najaf, Riphah International University Islamabad,
Pakistan, Islamic Business and Finance, Pakistan, Tel: +92 51 111 510 510;
E-mail: rabianaajf@gmail.com
Received  February 25, 2017; Accepted March 09, 2017; Published March 16,
2017
Citation: Najaf R (2017) I S Monetary Policy Necessary for the Economic
Development of Less Developed Countries with Special Reference to Pakistan.
Bus Eco J 8: 289. doi: 10.4172/2151-6219.1000289
Copyright: © 2017 Najaf R. This is an open-access article distributed under the
terms of the Creative Commons Attribution License, which permits unrestricted
use, distribution, and reproduction in any medium, provided the original author and
source are credited.
Volume 8 • Issue 1 • 1000289
Citation: Najaf R (2017) I S Monetary Policy Necessary for the Economic Development of Less Developed Countries with Special Reference to
Pakistan. Bus Eco J 8: 289. doi: 10.4172/2151-6219.1000289

Page 2 of 3

monetary policy and GDP. Monetary authority had suggested that Model II
Government should have focused on inflation rate.
inf=b0+b1lr+b2M2+b3Cr+Ui (2)
Adefeso and Mobolaji [1] analyzed impact of monetary policy on
development of India, for proper results they had taken data from 1998 Where
to 2008 and applied OLS model. inf: Inflation rate
Borio [2] analyzed impact of monetary policy on development of Lr: Liquidity ratio
Pakistan, for proper results they had taken data from 1991 to 2010 and
applied VAR model. M2: Broad Money Supply

Diamond [3] viewed impact of monetary policy on development Cr: Cash ratio
of USA, for proper results they had taken data from 1995 to 2005 and b0, b1, b2 and b3: Parameters
applied VECM model.
Ui: Error term
Folawewo and Osinubi [4] examined impact of monetary policy on
development of UK, for proper results they had taken data from 1991 Model III
to 2001 and applied VECM model. bop=c0+c1lr+c2M2+c3Cr+Ui (3)
Friedman [5], observed impact of monetary policy on development Where
of Asian countries, for proper results they had taken data from 1999 to
2009 and applied unit root and ADF model. bop: Balance of payment

Friedman and Schwartz [5], viewed impact of monetary policy on
development of Malaysia, for proper results they had taken data from
1994 to 2004 and applied ECM model.
Gertler and Gilchrist [6], analyzed impact of monetary policy on
development of France, for proper results they had taken data from
1991 to 2001 and applied VECM model.
Keynes [7] viewed impact of monetary policy on development of
Russia, for proper results they had taken data from 1999 to 2012 and
applied OLS model.
Kogar [8], examined impact of monetary policy on development
of Libya, for proper results they had taken data from 1996 to 2008 and
applied multi regression model.
Modigliani [9] observed impact of monetary policy on development
of Japan, for proper results they had taken data from 1991 to 2001 and
applied VECM model.
Methodology
The purpose of this research is to find out impact of monetary
policy on the money supply, GDP and economy of Pakistan [10]. For
this purpose, taken data from 1982 to 2009 and applied OLS model,
here monetary policy is dependent variable and GDP, inflation and
BOP are independent variables.
Equations
Model 1
gdp=a0+a1lr+ a2M2+a3Cr+Ui (1)
Where
gdp: Gross Domestic Product
Lr: Liquidity ratio
Lr: Liquidity ratio
M2: Broad Money Supply
Cr: Cash ratio
c0, c1, c2 and c3: Parameters
Ui: Error term
Sample: 1981 2007
Included observations: 28
Test assumption: Linear deterministic trend in the data
Series: GDP INFLR BOP LQR CASHR MS Lags interval: 1 to 1
Model estimation
BOP= -102969.7 + 2257.86 (LQR) + 0.652737 (MS2) -15777.86
(CASHR)
T=(-0.162) (0.166347) (7.271161) (-0.417154)
Empirical Results
In this paper, we analyzed impact of monetary policy on GDP
of Pakistan, for this purpose, we utilized unit root, Johansen co-
integration, regression and VECM model. We conducted unit root
test for checking stationary between macroeconomic variables [11-13].
Unit root also determine level of co-integration between variables. In
Table 1 there are found stationary between variables. Table 1 is showing
that null hypothesis is rejected. This thing is prompt us to apply ADF
test. These are showing that some variables are stationary at level first
I while some are at order 2. Table 2 is showing that not any variable
is stationary at levels. The observed values of ADF are showing level
of stationary. The results are providing some evidences that variables
are non-stationary here, after taking results null hypothesis is accepted.
The results are showing that some variables are stationary at level 1

M2: Broad Money Supply 5 Percent 1 Percent Hypothesized  

Eigenvalue Ratio Critical value No. of CE(s)  
Cr: Cash ratio 0.935595 213.3559 94.16 103.19 None
0.89945 144.7922 68.53 76.08 At most 1
a0, a1, a2 and a3: Parameters
0.836303 87.36714 47.22 54.47 At most 2
Ui: Error term Table 1: Co-Integration Test.

Bus Eco J, an open access journal Volume 8 • Issue 1 • 1000289

ISSN: 2151-6219
Citation: Najaf R (2017) I S Monetary Policy Necessary for the Economic Development of Less Developed Countries with Special Reference to
Pakistan. Bus Eco J 8: 289. doi: 10.4172/2151-6219.1000289

Page 3 of 3

while; some are stationary at level 2. After applying unit root test and
applied co integration between the variables. After co-integration, it is
found that there is long run equilibrium (Tables 3 and 4). There is co-
integration between monetary policy and macroeconomic variables.
In this paper, there are found mathematical relationship between
these variables. Our regression results are showing that there is linear
relationship between GDP and explanatory variables. The values of R2
is showing endogenous variables jointly explained. The value adjusted
R2 is showing that model is significant and values of Durbin Watson
is showing positive autocorrelation between variables [14-16]. The
values of F-statistics are showing statistically satisfactory results. All
these results are showing that there is significant impact of monetary
policy on GDP of Pakistan. The empirical results are showing that there
is direct association between monetary policy and all other variables.
Our results are also trying to show that there is negative relationship
between monetary policy and inflation. Our results are showing that
there is indirect relationship between inflation and macroeconomic
variables. Our final results are showing that money supply is also
related with balance of payment. Tight monetary policy has bad impact
on GDP on economy.
Summary
1. This paper is trying to expose that central bank of Pakistan
has crucial role for development of economy.
2. The results of regression are showing that central bank of
Pakistan has not linkage with the increasing inflation rate.
3. This paper is also trying to show that central bank monetary
policies have best impact on GDP of Pakistan.
4. Inflation can be improved by providing different policies like
employment, improving operations of financial markets.
Conclusion
From last few decades, the central bank of Pakistan has crucial role
in development of economy. The central bank of Pakistan used latest
techniques for better monetary policy management and with help of
indirect control system central bank runs open market operations.
References
1. Adefeso H, Mobolaji H (2010) The fiscal-monetary policy and economic growth
in Nigeria: further empirical evidence. Pakistan Journal of Social Sciences 7: 142.
2. Borio C (1995) The structure of credit to the non-government sector and the
transmission mechanism of monetary policy: A Cross-Country Comparison.
Bank for International Settlement Working Paper.
3. Diamond R (2003) Irving Fisher on the international transmission of boom and
depression through money standard. Journal of Money, Credit and Banking
35: 49.
4. Folawewo A, Osinubi T (2006) Monetary policy and macroeconomic instability
in Nigeria: A Rational Expectation Approach. Journal of Social Science 12: 93-100.
5. Friedman M, Schwartz A (1963) Money and business cycles. Review of
Economics and Statistics, pp: 32-64.
6. Gertler M, Gilchrist S (1991) Monetary policy, business cycles and the
behaviour of small manufacturing firms. National Bureau of Economic
Research. Cambridge.
7. Keynes J (1930) Treatise on money. Macmillian P: 90.

Variable Coefficient Std. Error t-Statistic Prob. 8. Kogar C (1995) Financial innovations and monetary control. The Central Bank
of the Republic of Turkey.
C -105615.7 1116195 -0.094622 0.9255
LQR 471.2587 23756.77 0.019838 0.9844 9. Modigliani F (1963) The monetary mechanism and its interaction with real
phenomena. Review of Economics and Statistics, pp: 79-107.
CASHR 38075.84 66199.75 0.575167 0.5709
MS2 4.295953 0.157123 27.34148 0 10. Batini N (2004) Achieving and maintaining price stability in Nigeria. IMF
Source; Author’s estimation using E-view 3.0 Working Paper.
R2=0.9717398 11. Busari D, Omoke P, Adesoye B (2002) Monetary policy and macroeconomic
F (3, 28)=263.6124 stabilization under Alternative exchange rate regime: evidence from Nigeria.
Adj.R2=0.9680534
DW=1.382417 12. Milton F (1968) The role of monetary policy. American Economic Review 58:
1-17
Table 2: Co-Integration Test Coefficient 0.9717398.
13. Nnanna OJ (2001) The monetary policy framework in Africa: The Nigerian
Variable Coefficient Std. Error t-Statistic Prob. experience, pp: 11.
C 5388054 18.24944 2.95246 0.0072 14. Oliner S, Rudebusch G (1995) Is there a bank lending channel for monetary
LQR -0.561755 0.388417 -1.44628 0.1617 policy? Economic Review, pp: 3-20.
CASHR -0.0000299 0.0000258 -1.159594 0.2582
15. Sanusi J (2002) Central Bank and the macroeconomic environment in Nigeria.
MS2 0.357664 1.082346 -0.330452 0.7442
Source; Author’s estimation using E-view 3.0 16. Tobin J (1978) A proposal for international monetary reform. Easter Economic
R2=0.17623 Journal 4: 153-159.
F, (3, 28)=1.6460245
DW=1.028959
Adj. R2=0.068771
Table 3: Co-Integration Test Coefficient 0.17623.

Variable Coefficient Std. Error t-Statistic Prob.

C -102969.7 637728.9 -0.161464 0.874
LQR 2257.853 13573.26 0.166347 0.8694
MS2 0.652737 0.089772 7.27117 0
CASHR -15777.86 37822.73 -0.417154 0.6805
Source; Author’s estimation using E-view 3.0
R2 = 0.707681
F, (3, 27) = 18.56037
DW = 1.533354
Adj. R2 = 0.669552
Table 4: Co-Integration Test Coefficient 0.707681.

Bus Eco J, an open access journal Volume 8 • Issue 1 • 1000289

ISSN: 2151-6219